Creditors’ Committee Cannot Obtain Derivative Standing to Sue Fiduciaries of an LLC

April 2018

Publication| Bankruptcy & Corporate Restructuring

In 2011, the Delaware Court of Chancery surprised many in CML v. Bax by holding that creditors of a limited liability company (LLC) cannot be granted derivative standing to sue members, managers or controllers for breach of fiduciary duty — even if the LLC is insolvent. This created a different regime for LLCs than what exists for corporations: The Delaware Supreme Court has made it clear that creditors of an insolvent corporation might be vested with derivative standing to sue officers, directors or controlling stockholders for breach of fiduciary duty.

Shortly after CML v. Bax, this author asked the following questions in two separate articles, including one in the ABI Journal: What about a creditors’ committee? Does Bax also preclude a creditors’ committee in a chapter 11 case from obtaining standing to sue the fiduciaries of an LLC derivatively? The author noted that if the answer is “yes,” the effect on ensuing bankruptcy cases of LLC debtors could be significant.

Somewhat surprisingly, it appears that no reported opinion in the ensuing seven years has addressed the issue. That ended with the Delaware Bankruptcy Court’s recent opinion in Official Committee of Unsecured Creditors of HH Liquidation LLC v. Comvest Group Holdings LLC, et al. (In re HH Liquidation LLC). The HH Liquidation opinion holds, just as this author predicted in 2011, that creditors’ committees of an LLC debtor cannot be granted such standing.

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